Working Paper: CEPR ID: DP5491
Authors: Darrell Duffie; Nicolae B. Grleanu; Lasse Heje Pedersen
Abstract: We provide the impact on asset prices of search-and-bargaining frictions in over-the-counter markets. Under certain conditions, illiquidity discounts are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, or when risk aversion, volatility, or hedging demand are larger. Supply shocks cause prices to jump, and then 'recover' over time, with a time signature that is exaggerated by search frictions. We discuss a variety of empirical implications.
Keywords: asset pricing; bargaining; liquidity; risk; search
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ease of finding counterparties (G19) | level of illiquidity discounts (G33) |
| sellers having less bargaining power (D43) | level of illiquidity discounts (G33) |
| fraction of qualified owners is smaller (C25) | level of illiquidity discounts (G33) |
| risk aversion (D81) | level of illiquidity discounts (G33) |
| volatility (E32) | level of illiquidity discounts (G33) |
| hedging demand (J23) | level of illiquidity discounts (G33) |
| supply shocks (E39) | price adjustments (L11) |
| intensity of search frictions (J69) | speed of recovery (C41) |